Services Buoy HP In Tough First Quarter

Hewlett-Packard's mid-2008 acquisition of Electronic Data Systems (EDS) helped propel 116 percent year-over-year revenue growth for HP Services in the just-completed first quarter, even as the computing giant's five other main business groups all saw sales shrink against the year-ago period.

"I'm especially proud of our services segment. The EDS integration is ahead of the operational plans we shared with you last year," HP CEO Mark Hurd told financial analysts Wednesday during a call to report the company's first-quarter earnings.

For the just-finished quarter, HP grew its revenue 1 percent to $28.8 billion, up from $28.5 billion in the first quarter of 2008. But sequentially, HP's revenue dropped by more than $4.8 billion against the fourth quarter of 2008, evidence of the "tough market" Hurd described on the call.

The company does not expect conditions to improve in the second quarter of 2009, possibly not for the rest of the year.

CFO Cathie Lesjak said HP is projecting a 2 percent to 3 percent decline in revenue for the current quarter against Q2 of last year, and a drop of 2 percent to 5 percent for the full year as compared with 2008.

While HP Services enjoyed a giant revenue bump to $8.7 billion over the prior-year period and profits of $1.1 billion, other business segments performed more in line with the difficult economy. Revenue for HP's Personal Systems Group (PSG) and Imaging and Printing Group both dropped 19 percent year-over-year, and the company's Enterprise Storage and Servers business saw its sales decline by 18 percent.

Hurd described HP's quarter as "one of our strongest from an execution perspective" given the economic conditions. HP would continue to cut costs in the coming quarter, plans which could include layoffs but not in R&D, the chief executive said.

Asked about issues with PSG inventory in the channel, Lesjak said HP is currently "up a week." But she downplayed concerns by noting that by historical standards, the situation was not particularly notable.

"We'll get [channel inventory] nailed," Hurd added. The CEO also promised that the current slowdown of commercial hardware refresh rates would eventually pay off with "a big refresh opportunity."

"I can't give a specific date, but this will turn and we want to be in a position to garner a significant portion of it," he said.

Hurd also fielded a question about the "cannibalization" of PC notebook sales with the recent success of cheaper, smaller netbooks.

Apologizing for having to "duck the question," he said HP needs more data to determine if this is happening, but did point to numbers from "people who claim expertise" that about 20 percent of netbook purchases could be described as directly cutting into what would have previously been sales of more profitable notebooks.